Canada: Natural gas prices highest since '86 - Year of soaring profits for gas-weighted firms
Financial Post, January 19
Carol Howes
CALGARY - Natural gas producers find themselves in the same
place as Harrison Ford in a scene from Raiders of the Lost Ark --
running to stay ahead of the ball.
In the past year, natural gas, once considered the ugly sister of the
oilpatch, has become a highly sought-after jewel. But unlike in past
years, tight supply is making it difficult to offset natural declines
while still meeting increasing demand in both Canada and the United
States.
"I've never seen this situation," says Steven Bradley, who heads up
marketing for Westminster Resources Ltd., a junior gas play. "Now
we're basically just-in-time gas supply. When you need it, you'd
better hope it's there."
Despite a recent decline in gas prices because of a fairly balmy
North American winter, which started with the warmest November
in 50 years, overall prices for the commodity in Western Canada
were higher in 1999 than any time since the industry was
deregulated in 1986. Prices averaged about $2.70 per thousand
cubic feet for 1999, up from $1.95 last year.
Alberta plant-gate spot prices averaged $3.10 in the fourth quarter,
up from $2.29 a year ago.
Much of the rise in the past year is the result of a combination of
pipeline expansion of more than a billion cubic feet a day out of
Western Canada at the end of 1998 -- which allowed greater
access to markets, primarily in the United States -- and declining
supply south of the border.
When oil prices collapsed in 1998, so too did capital spending.
Drilling was slashed in the U.S. during the second half of 1998 and
the first half of 1999. In Canada, while overall drilling dropped off,
natural gas drilling did not because of attractive higher prices. An
estimated 10,000 wells were drilled in Western Canada last year,
70% chasing gas.
At the same time, a number of companies announced expansion
projects into the Northwest Territories and off the East Coast to tap
into deeper and more difficult natural gas finds.
Gas-weighted companies saw their profits -- and share prices --
soar. Shares of Canadian Hunter Exploration Ltd. were up 137%
by year-end, while Bonavista Petroleum Ltd. was up 92%.
Anderson Exploration Ltd. was up 24%. Junior companies also
benefited, with Ventus Energy Ltd., for instance, up 103%.
Yet despite the expansion in gas drilling, pipelines leaving Western
Canada are still not filled to capacity and up to a billion cubic feet a
day is being pulled out of storage in Alberta this winter, higher than
normal for such warm temperatures.
"It looks like the U.S. is a bit short of gas compared to where they
thought they were. Alberta is very short of gas; all we need is a little
bit of cold weather and you'll see things go right through the roof,"
says Mr. Bradley.
"I don't think I've ever seen it this closely in balance. It's right on the
edge."
Demand in the U.S. for cleaner-burning natural gas is expected to
grow by 2.6% a year for the next 15 years, largely to fuel expanding
electricity needs, according to a report released recently by the
Washington-based Gas Research Institute.
At the same time, however, the reserve life for natural gas in
Western Canada's basin has declined over the past decade, falling
from 30 years' production to about 10.
Yesterday, the Canadian Gas Association called on Ottawa in its
next federal budget to credit businesses that have introduced
programs to reduce greenhouse gas emissions and cut taxes for the
natural gas industry to make it more competitive with the U.S.
Martin Molyneaux, director of research at FirstEnergy Capital
Corp., says 1999 will go down in history as one of the most volatile
years for gas prices, "along with being very tough to manage from
the viewpoint of investors and companies."
In July, industry analysts were forecasting record high prices this
winter because of fears of a gas shortage in the U.S. But in
September, U.S. prices began bouncing around from $2.90 down
to $2.56 in October, rocketing back to $3.09 in November and
collapsing to $2.12 in December.
Mr. Molyneaux expects Canadian prices to average $2.95 for
2000, with an average $3.20 to $3.35 for the first quarter. Other
analysts also expect prices to average $3 this year.
Despite a 50% rise in U.S. drilling activity levels since April, due to
the comeback in oil prices, natural gas production is still down from
last year in the U.S., says Ed Peplinski, commodities analyst with
ARC Financial Corp. in Calgary. In addition, more than normal
amounts of gas are being pulled out of storage in the U.S.
Ed Small, director of Canadian energy for Cambridge Energy
Research Associates, agrees prices in 2000 could be the same or
higher than last year because of the close supply-demand balance.
"We're looking at a situation where there're going to be relatively
strong gas prices in Canada for the next two to three years," says
Mr. Small, also based in Calgary. "Companies have faith that gas
prices are more sustainable. They don't have the same faith in oil
prices because oil prices are driven more by politics than they are
by fundamentals."
Even if gas supply does turn around in the second half of 2000 and
U.S. prices soften, additional pipeline capacity in Canada will offset
any decline, say analysts.
Exports to the U.S. will increase with gas now flowing from Sable
Island off the East Coast and when the Alliance Pipeline begins
flowing gas directly to Chicago from Western Canada in the fall.
(Natural gas production in Canada has doubled over the past 20
years to 5.6 trillion cubic feet, three trillion of which is exported to
the U.S.)
Drilling is expected to be up again over 1999.
PanCanadian Petroleum Ltd., Petro-Canada and Talisman Energy
Inc. have all announced capital budgets of more than $1-billion for
2000, much of that directed toward gas exploration and production.
Other companies are expected to follow suit, provided access to
equity improves.
"Supply constraints and higher oil prices aren't going away any time
soon," says Mr. Peplinski. "Every year that goes along and you have
these results on the supply side, and you stack them up with what
you think demand is going to grow at ... it just makes for a very
compelling story on natural gas prices over the next few years."
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